Challenges in wholesale

Wholesalers the world over are continuing to innovate as they strive to remain relevant in a fast-changing industry. They are all offering new types of services in addition to their traditional staples, while transitioning their infrastructure away from legacy standards in favour of IP and Ethernet. Economic storm clouds are expected to continue to abate as the year progresses, but most carriers are still planning to spend the next 12 months attacking their cost base while looking for new value-added ways to grow turnover and profit. Here we consider, region by region, how the wholesale telecoms sector is coping with the challenges it faces.

Any wholesale carrier with an eye for the future is moving beyond offering simple voice and data services, says Ed Stulga, assistant vice president of wholesale marketing and portfolio management at AT&T Business Solutions: “The business model for global wholesalers is changing,” he says. “Our major growth areas at the moment are things like VoIP, mobile services, unified communications. The challenge is how to pivot away from traditional areas and be more of an applications and solutions provider. That’s not to say that traditional services are not still a big chunk of what we do.”

Beyond the obvious fact of the US wholesale sector’s maturity, Stulga doesn’t see a huge gulf between what AT&T is trying to achieve there versus other parts of the world: “Fundamentally there’s not that much difference,” he says. “It’s all about customers looking to us to help them run their business – the same anywhere. The US remains competitive and it is shifting away from fixed line to wireless business. That’s a challenge for carriers like us, but also an opportunity. It’s a chance to fulfil the demand for IP-based services that’s growing exponentially everywhere you look. It’s exciting and challenging at the same time.”

Stulga concedes that a flat global economy has made life tough for large global carriers like AT&T: “But the economy will turn around and we’ll need to make sure we’re ready for that,” he says. “We need to maintain our discipline and keep investing in our network. We’re doing this on a worldwide basis.”

Helping customers to deal with the challenge of mobile data is clearly an important part of AT&T’s plans for 2010: “We’ve got to be ready for a world where there are already so many different applications you can run from your mobile device,” says Stulga. “Just look at the impact of the iPhone. This will be a growth area over the next couple of years at least. And we’re investing in things like unified communications too, with our telepresence service for example. We’re going to spend the next year investing in areas like these. I’m bullish about telecoms in general, and about wholesale in particular.”

Headquartered in the US, but with bases all over the world, Ibasis has a wide window on the market for international wholesale voice services. “There are carriers everywhere trying to find efficiencies in international voice, somewhere that it makes increasing sense to allow someone else to do it for them,” says Chris Ward, senior director of marketing with Ibasis. “They are finding, in many cases, that international voice is just not delivering them the EBITDA that their other activities are. It’s complex, and needs scale, automation and support systems before you achieve the necessary efficiencies. Why not leave it to a large guy who makes it a speciality?”

He foresees that the outsourcing of international voice services will be a growing trend throughout 2010: “Look at Tata and BT, BICS and MTN, us and KPN and TDC,” he says. “It happens that our two deals are European, but it’s going on everywhere.”

Like Stulga, Ward is confident that worldwide economic prospects will play into the hands of the big carrier names: “In general, I’d say the global economy is beginning to turn, so we should see more growth in wholesale business in 2010 than we saw in 2009,” he believes. He is also in accord with AT&T in expecting great things from the growth in mobile traffic: “We’re expecting to grow in the business of terminating traffic for mobile operators,” he says. “This will be important for us next year.”

He claims that Ibasis is also in pole position for success in an IP world: “We were investing in IP infrastructure from day one, so we’re in a better position than most to make the next jump to things like IPX,” he says. “We’re expecting strong business growth in north America, and in Latin America too. Brazil alone represents a big opportunity both for termination and origination.”

Ibasis is not alone in looking to south America as a cradle of opportunity: “The Latin American region has a lot of upside for carriers like us,” says Hector Alonso, managing director for Latin America at Global Crossing. “This year we have completed a significant expansion of our IP network capacity following growing demand in the region. The Latam region has one of the highest IP market growth rates worldwide.”

He says that to enhance its appeal beyond traditional service areas, Global Crossing has launched new products offering things like virtualisation and, in the form of its EtherSphere range, global Ethernet.

He identifies numerous challenges that Global Crossing must address over the next year or two: “We’ve got to keep providing services from value-added to commodity at competitive prices,” he says. “We need to offer short provisioning intervals, end-to-end service management and an improved customer experience.”

The adoption cycle of new technologies among local and regional service providers in Latin America is a challenge all of its own: “Carriers here have been slow in the take-up of new transport services such as carrier Ethernet services,” he explains. “The credit crunch has impacted the rate of investment in the region, delaying for example network expansion to new markets.”

Global Crossing must also address broader challenges, common to other carriers with a global footprint, says Alonso: “The wholesale market has undergone significant transformation in the last 10 years, moving away from basic voice transport and connectivity services,” he says. “In today’s more complex and competitive market, a number of challenges face the leading wholesale providers – for example scarcity of capital has pressured carriers to optimise their investment in new capacity with the aim of ensuring that they satisfy market demand while also meeting accelerated pay-back schedules on that investment.”

He observes too that the commoditisation of basic transport services has been driving wholesale providers to expand into value-added areas, such as managed services, to ensure at least some level of differentiation in their service portfolio. “The wholesale market also continues to be characterised by pockets of price erosion, challenging carriers to operate more leanly and efficiently,” he says. “In addition, wholesale providers are challenged to keep pace with the shift in retail demand in both the consumer and business markets, where mobile and broadband applications are increasingly driving the demand for wholesale services.” 

He sees the highest growth opportunity in the global wholesale market as emerging markets: “Carriers are challenged here to execute on effective partnering strategies to tap a great revenue opportunity,” he concludes. 

Europe might superficially be every bit as competitive and saturated with services as north America, but for carriers with an appropriately global outlook it is an exciting place to be based right now, says Jonathan Wright, director of infrastructure and bandwidth services at Interoute.

“We’re increasingly seeing Europe as a global fulcrum for traffic,” he says. “10 years ago, traffic was all transatlantic to places like New York and Washington DC. Now with countries like India and China leading the way, Europe is being pushed more and more as a hub between the established economy of the US and the rest of the world.”

He says a consequence of this shift is that Interoute is doing a great deal of backhaul business that didn’t exist until recently: “We’re working with carriers from places like India and Africa who want to get into Europe,” he says. “We can give them ‘Europe in a box’, accelerating their entry into the market. We’re also selling back into their geographies.”

The wholesale market in Europe is going through a period of technical change, with a lot of carriers busy upgrading their backbone networks, says Lutz Blank, wholesale marketing director at Colt: “We’re moving from a Sonet and SDH world to an Ethernet and MPLS world,” he says. “Operational costs are dropping as a result, but prices are falling at the same time. The only way to prosper is to ramp up volumes. More innovation is needed on the technology side or you’ll be out of the market sooner or later. You’ll have to integrate with competitors or change your business model. Colt is in a strong position. We’re one of the consolidators not one of the consolidated.”

Patrick George, vice president of marketing and product management at Belgacom International Carrier Services (BICS), foresees a great deal of consolidation on the way, in the voice side of the market in particular. “In voice, we’re definitely going to see some more consolidation, along the lines of us and MTN or Tata and BT,” he predicts. “Two giants from completely different points of view reached the same conclusion – that they were better off leaving that part of their business to people like us. That way they make better use of their resources and also cut costs.”

Carriers need also to continue bracing themselves for a transition to IP, says George: “More and more people are moving to VoIP,” he says. “We’re expecting TDM revenues to peak in a couple of years, with most of the growth in voice coming from VoIP.”

As with so many other carriers, BICS has identified mobile data, and the mobile sector in general, as a big area of focus over the next year: “More and more mobile operators are recruiting third parties to manage the international side and look after things like roaming hubs,” says George. “This is enabling bigger ARPUs and lower costs. We’re going to keep on surfing that wave. We’re also working with them on mobile money transfer solutions. It’s a great way for them to make extra revenue.”

But with bigger deals in increasingly far-flung parts of the world come difficult responsibilities, says George: “I guess the biggest challenge for us is that as more trust is put in us, we have to repay it with higher quality of service and by giving more control to customers in the form of better reporting tools,” he says. “They want more security too. It’s through security and control that we will build longer relationships. Also, the bigger you grow, the harder it becomes to stay flexible. We’ve got to work on that.” 

He anticipates that 2010 will see BICS doing more business in Asia, citing in particular big and still largely untapped markets like India and Indonesia. “Unlike in Europe, service providers in these places are mainly looking for a partner to help them with good coverage and with providing a good service,” he says. “They are not always getting the attention they want from big carriers, and that’s where we can help. The newer the market, the more they are looking for someone to help them add value for their customers. In a mature market like Europe, customers are more interested in cherry picking bits of what we offer more than they want a full partnership.”

He says that Europe will nevertheless continue to be a key market for Belgacom: “Growth is in the Middle East, Africa and Asia,” he says. “But of course you can’t grow there if you start to lose momentum in Europe. It’s tough being a euro company sometimes when you’re up against a dollar company like Ibasis. But currency differences are just a fact of macro economic life.” 

BICS is certainly not the only Europe-based carrier with a big eye for Asia. Epsilon Telecommunications, a wholesaler that was initially based solely in Europe now has PoPs all over the world, especially looking east.

“We’re providing connectivity, hosting and managed services for people who need presence in Asia, in places like Singapore and Hong Kong,” says Andreas Hipp, CEO at Epsilon. “Europe is still an attractive market, if highly competitive. In Europe I’d say we are in a niche, taking care of the nasty parts that others don’t want to do like cross connectivity and lots of small transactions. There’s some carriers that don’t want to do all the cabling and messy stuff. I’d say Europe’s not really a fun place for the major carriers right now. In voice, all the middlemen have disappeared, with customers turning instead to bigger players like Ibasis which are able to offer good pricing.”

Asia, he says, is a different sort of prospect for wholesalers, with lots of markets that are still in the process of opening up international gateways for the first time. “A year ago, Thailand had only one international licensee,” he points out. “There’s a big Asian boom, but sometimes people get their hopes up too high about it. Asia is cost conscious, as there aren’t that many rich people. Our challenge over the next year is to continue to bring our European customers on board and provide them with Asian connectivity. There’s huge potential here if prices stay sensible.”

The essence of wholesale has moved well beyond the delivery of core infrastructure, and has a lot more to do with providing partnership for customers that need to extend their reach into new and unfamiliar regions, like Asia. So believes Murray Hankinson, director of corporate development, strategy and global marketing at Telstra International: “Wholesale is more about end-to-end service than the traditional network side of it,” he says. “It gives us an opportunity to deliver this service in regions where we have a speciality – Asia-Pacific and also the Middle East.”

The telecoms world needs to come to terms with the idea of Asia as an important economic region in its own right, he believes: “In the old days, they’d say that when the west coughed, the east would catch a cold,” he says. “But global decision making is moving in an eastward direction now. Singapore and Hong Kong are not so far behind London and New York on the key financial indices. There’s also a healthy intra-Asia economy developing that has no need to engage with the west as much as it once did.”

He says that a standard model of 10 years ago would-be China making a product end-to-end, and then selling the finished item to the US. “Now, some of the product might be made in Vietnam, some in the Philippines, some in China and the end product sold in India,” he says. “This is all prompting the question among would-be wholesale customers about who the right partner is to help them into those markets. They’ve got enterprise customers wondering where to invest their balance sheet – in Europe where they’ll be guaranteed low returns? We can help assure these customers that if they do business in Asia they can have the quality of ICT products they are used to. It’s our strategy to keep on investing in these emerging Asian markets.”

As Europe and the US look to Asia, there are powerful Asia-based interests looking the other way. In fact it is by no means out of the question that the dominant global wholesale names of tomorrow will predominantly be Asian companies that barely rated a mention in developed markets until a few years ago.

Asian carriers nevertheless face the same market pressures as anybody if they want to stay big in wholesale, believes Byron Clatterbuck, senior vice president of global transmission services at Tata Communications. “There aren’t too many standalone ‘wholesale only’ companies left any more,” he observes. “Like many, we do wholesale, enterprise and broadband retail as well, of which wholesale remains a useful cash cow.”

He says Tata’s wholesale strategy revolves at present around emerging markets: “Places like India are still looking for growth, as well as China, eastern Europe and Russia too,” he says. “We want to focus on markets where we can add value and find growth. To that end, we’ve launched our TGN-IA intra-Asia cable connecting Singapore, the Philippines, Hong Kong and Japan, with Vietnam about to be lit. We’ve deliberately designed our route as far away from the Taiwan earthquake zone as possible. You can’t just build a cable these days unless you’re adding value and doing something different. It’s all about delivering maximum possible diversity and redundancy at the minimum possible cost.”

Clatterbuck believes there are many US carriers that want to expand into Asia: “They want a stake here so long as they can ensure they are providing the same quality that customers in the US are accustomed to,” he says. “They’ll be looking for a number of different network operators to partner with, including us. We’re well positioned into and out of India and Asia. And there’s more growth potential there than other parts of the world. We’re preparing ourselves for solid growth in both wholesale and enterprise business.”

Christian Michaud, as senior VP of product marketing and business development with Tata, keeps an eye on global wholesale voice trends as part of his remit. “Wholesale voice has become complex,” he says. “But there are opportunities for wholesale carriers in voice, for example in outsourcing, as with our deal with BT. This is going to be a continued area of growth for us, with lots of carriers around the world looking to reduce cost and complexity, and reduce their headcounts.”

Michaud says that through outsourcing voice, carriers can actually develop into new service areas quicker than they can on their own: “But to be one of the outsourcing providers you need to be big,” he says. “We’ve been growing our voice traffic this year while many others have shrunk. It’s primarily European and north American carriers looking to outsource. Wholesale voice is not that important a place to be for them so they are more open to discussion. In Asia, it’s not so much about outsourcing as who can help deliver particular solutions.”